Germany says won't delay plans to isolate risky bank business

BERLIN (Reuters) - The German government will not delay its plans to isolate risky hedge fund activities from banks' normal retail business but will consider aligning its law with European rules to keep costs down for German banks, the finance ministry said on Friday.

German banks have lobbied for the government to ease and postpone the law, which will come into force in 2016, as it is tougher than EU regulation currently under negotiation.

After the collapse of Lehman Brothers in 2008, world leaders pledged to tackle banks that were "too big too fail". Yet during the crisis, many of Europe's biggest banks continued to grow.

"The government does not plan a delay of Germany's law to split banks, as Germany's finance sector is demanding," Finance Ministry spokeswoman Marianne Kothe told Reuters.

"But the government will assess possible ways in which a ... disproportionate restructuring effort for German financial institutes can be kept within limits without challenging the goal of the German law to split banks," she added.

The finance ministry statement is the first sign so far that Germany, which pushed ahead together with France on tough national rules that limit the fallout of risky trading, may be open to toeing the pan-European line once that has been finalised.

The European Commission in January presented a proposal for a new law to reform the way big banks take risks when trading but it received criticism from member states and the European Union parliament and is yet to be finalised.

The EU plan shies away from suggesting any splitting of big banks and opts instead for a ban on proprietary trading - when banks trade using their own funds, an activity that has already been much reduced.

Berlin has signalled it could drop a bank's automatic obligation to split its two arms - if it has enough securities - and instead leave the decision to the supervisor BaFin. European rules do not foresee an automatic split.

"If the German government were to assess the German law on splitting banks along the likely European rules, that would create security in terms of law and planning for German banks," said Michael Kemmer, head of Germany's corporate banking lobby.

"Otherwise they would have to implement restructuring ... that would have to be reversed completely or in part once the European regulation comes into force," he said, adding that if Germany were to go it alone, the country's banks and the real economy would be at a competitive disadvantage.

However, the Social Democrats, the junior partners in Chancellor Angela Merkel's government, signalled their resistance.

"Separating certain risky business, such as credit to hedge funds, from banks' core business is a central lesson from the financial crisis," said Carsten Schneider, finance expert and deputy SPD parliamentary floor leader.

"The last (Commission) proposal already fell short."

(Reporting by Matthias Sobolewski; Writing by Annika Breidthardt; Editing by Stephen Brown and Toby Chopra)